Obama Administration Decides Not to Change Tax Rules on Overseas Income

Ann All

Earlier this year when I wrote about President Obama's intention to change the way the federal government taxes overseas profits earned by multinationals with offshore operations, I shared the sentiment of a Silicon Valley lobbyist who said on a Richter scale of one to 10, the proposal was "about a 20" and predicted a strong pushback from companies that would be affected by the change.


It was strong, all right. So strong the Obama administration has dropped the idea, at least for now.


A Wall Street Journal story runs through a series of key events that culminated in the administration's decision to scrap its proposal to modify tax laws concerning overseas profits, which would have affected tech giants with lots of offshore operations such as Cisco, IBM and Microsoft. There was a media blitz by companies including Intel and Eastman Kodak Co.; the release of studies by the Business Roundtable, the U.S. Chamber of Commerce and the National Association of Manufacturers that showed the proposal would damage American companies' ability to compete with overseas companies; and a conference call between top economic advisers and companies like IBM, Citigroup and Google.


Microsoft's Steve Ballmer warned of "unintended consequences" during a May visit to India, telling a reporter from the India Express it was unclear whether such an action would create more jobs in the United States or cause companies to hire more offshore workers. In June, 39 Democrats informed House Speaker Nancy Pelosi they found the proposal anti-competitive and opposed it. In July, almost 300 companies signed a letter critical of the proposal that was sent to all members of Congress. The proposal's chances also were hurt, of course, by legislators' unwillingness to consider it when they are already wrestling with health care reform and other measures.


So the proposal is off the table, for now, though the Journal article hints that businesses are concerned that it might be revived since the White House needs to raise money to help fund health care reform. Reuters' James Pethokoukis floats the idea that the administration may have shelved the proposal because it's considering several ideas offered by economists sponsored by the Tax Foundation, notably the elimination of America's 35 percent corporate income tax in favor of a value-added tax of 5 to 6 percent. He writes:

Obama supporters and fellow travelers have been launching trial balloons all over Washington promoting a VAT to deal with Uncle Sam's huge budget deficits. And if that is the direction the White House wants to go, why spend the time and political capital on a corporate tax increase that may only be temporary?

According to another Reuters piece, the House Ways and Means Committee is working on a broad piece of tax-reform legislation that may be introduced next year and will likely include a proposal to lower the corporate tax rate by 7 percent or more.

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